Tesco Stores Ltd. v Constable & Ors

In 2003 work began on an ambitious construction project. The plan was to enclose a section of the railway that ran through a cutting near Gerrards Cross by installing concrete tunnel sections over the cutting and then building a supermarket on top of the site. The supermarket was to be operated by the claimant (“Tesco”). The railway track and surrounding land were owned by Network Rail. The company operating the railway was Chiltern Railway Company Limited (“Chiltern”) which was granted a contractual right to run trains on the track by a Track Access Agreement made with Network Rail.

The rail regulator, formerly the Strategic Rail Authority, later the Office of the Rail Regulator, required Tesco to take out public liability insurance cover of £155 million “in respect of legal liability which may be incurred by [the insured] in respect of death or bodily injury to any person and loss or damage to property arising from activities authorised by each licence holder.” Prior to the commencement of the project, Tesco entered into a Deed of Covenant (“the Deed”) with Chiltern which granted Chiltern a very wide contractual indemnity up to £155 million. Clause 4.2 of the Deed required Tesco to pay Chiltern “on demand such sums as shall from time to time fairly compensate them for all and any costs, losses or expenses arising out of or resulting (directly or indirectly) from …. the carrying out of the Works …. on its existing and/or future railway passenger business.”

On 30 June 2005 a section of the tunnel collapsed onto the railway lines below. Much debris fell upon the lines but no property belonging to Chiltern was damaged. The railway line between Beaconsfield and Denham stations was closed for 51 days with the result that Chiltern was unable to operate its train service through Gerrards Cross during this period. Chiltern accordingly made a claim under the Deed which was settled on 29^th June 2007. The major part of the claim was for loss of passenger revenues up to 2010. The precise sums specified in the settlement are confidential but it is known that the settlement includes a sum or sums by way of compensation for loss of business to Chiltern resulting from a falling-off of passenger revenue after the line was re-opened compared with the position before the closure.

Tesco arranged an Underlying Policy of Insurance in respect of the project in the form of a Standard Project Insurance Package consisting of five numbered Sections: (1) Construction/Erection All Risks – covering the works, plant, equipment, site buildings, existing structures and employee possessions etc. against all risks of physical loss, destruction or damage; (2) Increased Cost of Construction – covering against additional costs of construction due to loss or damage to permanent or temporary works covered under Section 1 and associated expenditure upon expediting potential delayed completion; (3) Public Liability – providing the cover at issue in this claim; (4) Non-Negligence – covering expense, liability, loss which Tesco as Employer incurred by reason of damage to property other than the works caused by collapse, subsidence, heave etc, happening or consequent upon a cause occurring during the Construction Period and arising out of or in connection with The Project; (5) Advanced Business Interruption – covering financial losses of commercial operations due to delayed completion, consequent upon Damage to property insured under Section 1. This cover was the one Section not taken up by Tesco.

Tesco was also insured under Excess Policies which provided cover in various layers in excess of £5 million in respect of Section 3 (Public Liability) and Section 4 (Non-Negligence) in the Underlying Policy. Tesco’s total cover for public liability was up to £155 million.

Tesco maintain that they are entitled to an indemnity under the Public Liability Section of the Insurance in respect of the sums they have agreed to pay Chiltern under the Deed. The defendant underwriters of the Excess Policies disagree. They say that Tesco’s liability in contract under the Deed is not within the Public Liability cover provided by Section 3 and is accordingly not covered by the Excess Policies. The First Excess Policy was for £15 million above £5 million and the Second Excess Policy for £30 million above £20 million. The settlement sum is within the limit of indemnity of the Second Excess Policy and accordingly the claim against the higher Excess Policies underwritten by the eighth defendant is not pursued.

Put shortly, the defendants contend that the Public Liability Section of the Underlying Policy only covers the liability of Tesco to third parties who as a result of the carrying on of the project works have suffered the kind of harm that would give rise to an action in tort. Chiltern suffered no such harm because it lacked a sufficient proprietary interest in the track to ground an action in tort whether in negligence or nuisance. Accordingly, the damage suffered by Chiltern was pure financial loss recoverable only in contract under the Deed and it follows that the liability for such loss is not within the Public Liability cover. The defendants also argue that even if liability for pure financial loss in contract is within the cover, the cover does not extend to liability for losses resulting from decisions taken by former passengers after the re-opening of the line to travel by means other than by Chiltern’s trains.

As a consequence of the closure of the line, Chiltern was entitled to receive compensation from Network Rail under the Track Access Agreement, subject to defined limitations of scope and value. Network Rail, whose track and signalling were damaged as a result of the collapse, could have pursued a tortious claim against those insured under the Excess Policies, claiming its liabilities to Chiltern under the Track Access Agreement as a head of damages flowing directly from the damage to its property, which in turn would have led to a claim by the relevant insured under Section 3 of the Excess Policies. However, the underwriters of the Excess Policies have agreed to indemnify Tesco directly for its liability to Chiltern insofar as a liability could be established against Network Rail under the Track Access Agreement and is otherwise recoverable under the terms of the Excess Policies. In this way, claims by Network Rail and other insured parties have been avoided and Chiltern has been compensated in respect of the collapse to the extent covered by the Track Access Agreement. But, in implementing this scheme, the defendants have not accepted that Tesco is entitled to an indemnity under the Excess Policies in respect of any contractual liability it might have had to Chiltern in respect of the same losses under the Deed.

Chiltern’s entitlement to compensation from Network Rail under the Track Access Agreement is less generous than its entitlement to compensation against Tesco under the Deed. Hence the claim under the Deed, the settlement and Tesco’s claim for an indemnity against the defendant underwriters in this action.

To assist in determining Tesco’s claim, three preliminary issues were ordered to be tried and it is the answers to those questions with which this judgement is concerned. I set out the wording of the issues below.

The Insuring Clause

The Insurers will indemnify the Insured against all sums for which [Tesco] shall be liable at law for damages in respect of a) death of or bodily injury to or illness or disease of any person b) loss or damage to material property....c) obstruction, loss of amenities, trespass, nuisance or any like cause, happening or consequent upon a cause occurring during the Construction Period or any extension thereof and arising out of and in connection with The Project.

The Contractual Liability Extension

Other than as may be stated or implied in The Contract, liability assumed by [Tesco] under contract or agreement and which would not have attached in the absence of such contract or agreement shall be the subject of indemnity under this Section only if the conduct and control of any claim so relating is vested in The Insurers and subject to the Exceptions and Extensions of this Section.

Exception 6 a

The Insurers shall not be liable in respect of … liability: (a) arising solely under fines, pre-determined liability or liquidated damages clauses in any contract or agreement.

Under these provisions each of the insureds – Tesco and its subsidiaries, the Project Manager, all contractors and sub-contractors, suppliers and manufacturers for their site activities, and Network Rail – was to be treated as a separate insured as if individual policies had been issued to each of them and the insurers waived their rights of subrogation as against any of the insureds, save in the case of fraud etc.

The Excess Policies provided that they should be subject to “all terms, exceptions and condition (sic) as per underlying Policy as far as applicable” and summarised the Public Liability cover as follows:

To indemnify the Insured against all sums for which the Insured shall be liable at law for damages in respect of death of or bodily injury or illness or disease to any person, or loss of or damage to Third Party Property Obstruction, Loss of Amenities, Trespass or Nuisance or any like cause …

The issues are to be decided on the assumption that (a) no property interest of Chiltern was affected and no material property of Chiltern was lost or damaged; and (b) Tesco's liability to Chiltern arose solely out of the Deed of Covenant.

Mr Fenwick QC for Tesco submitted that even without the Contractual Liability Extension, Tesco’s liability to pay the sums agreed in settlement of Chiltern’s contractual claims under the Deed was covered by the Insuring Clause. Mr Fenwick focussed on the words “liable at law”, arguing that they were amply broad enough to include liability in contract as well as in tort. He cited M/S Aswan Engineering Establishment Co. Ltd. v Iron Trades Mutual Insurance Co Ltd [1989] 1 Lloyd’s Rep 289 where Hobhouse J held in respect of a third party (legal and contractual liability) policy that the words “liable at law” on their ordinary meaning meant “legal liability” and not merely liable at common law, as contended by the insurers. Mr Fenwick also cited the Canadian case of Cultus Lake Park Board v Gestas Inc (1992) 75 BCLR (2^nd) 281 (BC Supreme Ct); (1995) 15 BCLR (3^rd) 89 (BCCA) where it was held that the words “legally obligated to pay” in a Municipal Liability Insurance did not confine the coverage to tort claims. I was also referred to a number of authorities (Footnote: ¹) from which Mr Fenwick said it was to be inferred that liability in contract was covered by policy wordings similar to the Insuring Clause in this case. In Mr Fenwick’s submission, the question was simply: is there liability for damages in respect of loss or damage to property, or obstruction, nuisance or loss of amenities?

Mr Fenwick submitted that the words “obstruction”, “loss of amenities”, “nuisance” and “any like cause” should be construed contra preferentem and given what he said were their ordinary, non-technical meaning and should not be held to be shorthand expressions for various torts. He suggested that if one asked as a matter of commonsense whether there had been an obstruction, or loss of amenities, or nuisance or any like cause consequent on the collapse that had caused Chiltern damage, the answer was obviously “yes”.

Mr Fenwick also relied on Exception 6 a, contending that if Section 3 of the Underlying Policy covered only liability in tort, the Exception would be unnecessary.

Finally, Mr Fenwick submitted that even if the Insuring Clause did not cover Tesco’s liability in contract under the Deed, it was clear that this liability was covered by the Contractual Liability Extension.

Mr Edelman QC’s starting point was the type of policy contained within Section 3. It was a public liability policy in terms that were the same as or very similar to the wording commonly found in such policies and the traditional view was that such wording afforded cover in respect of liability to the public at large for claims in tort or for the type of damage which was protected by the law of tort. Such policies did not cover liability to the public for damage solely to their economic interests. This latter liability could only arise in contract and if such liability was intended to be covered one would expect to see this clearly spelt out in the Insuring Clause.

Mr Edelman further submitted that the Insuring Clause must be construed as a whole. The words “in respect of” linked the first part of the clause – “all sums for which the insured shall be liable to pay” – to paragraphs a), b) and c). The wording used in these paragraphs was a mixture: in a) and b) the type of damage referred to was plainly damage to interests protected by the law of tort –bodily integrity and property interests; and in c) there was reference to: (i) two recognised torts – nuisance and trespass – both of which were available only to claimants who could show injury to a property interest; (ii) two well-established instances of the tort of nuisance – obstruction and loss of amenity; and (iii) “any like cause” -- which took its colour from the foregoing categories in the paragraph.

It followed, argued Mr Edelman, that the cover provided by the Insuring Clause was limited to liability in tort and a co-extensive contractual liability. Accordingly, Exclusion 6 a was simply intended to deal with situations where there was co-extensive liability in contract and tort and was designed to ensure that liability for heads of loss which would not be recoverable in tort did not slip in through the back door.

Mr Edelman contended that the Contractual Liability Extension did not require the Insuring Clause to be given a fundamentally different meaning depending on whether the extension applied or not. He submitted that it was plain from the words “shall be the subject of indemnity under this Section” that the extension should remain faithful with the Insuring Clause. It followed that, since paragraphs a) b) and c) in the Insuring Clause contemplate liability in tort, the effect of the extension is that liability in contract for harm for which the promisee could have recovered in tort, whether from the insured seeking the indemnity or some other party, is within the cover, but liability in contract for pure economic loss is not.

Mr Edelman argued that in the context of a construction project with multiple insured parties, a provision like the Extension is hardly surprising. The many insureds involved in a construction project may well agree inter se and/or with third parties potentially affected by the project that liability in tort arising out of the works should be shifted from the tortfeasor to another insured; and it was a term of the policy under General Policy Extensions 1 a) and f) that each of the insureds thereunder was to be treated as a separate insured and the insurer’s rights of subrogation against any of the insureds was waived.

The preliminary issues are to be answered by construing the relevant clauses in the Underlying Policy. Tesco advances no case of conventional estoppel.

In Tioxide Europe Limited v CGU International Insurance Plc [2005] Lloyd’s Rep IR 114 (para 40), a case turning on the true construction of an insurance policy, Langley J said:

The general principle is that the proper construction is to be determined by the ordinary and natural meaning of the words used in the contractual and commercial setting in which the words appear. The niceties of language may have to give way to a commercial construction which is more likely to give effect to the intention of the parties.

I gratefully adopt this formulation of the applicable principle, which in my judgement gives full effect to the approach enunciated by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912.

I agree with Mr Edelman that the starting point is the type of insurance that is contained in Section 3 of the Underlying Policy, namely Public Liability Insurance. This is a very important part of the background. I accept his submission that such policies are generally regarded as not affording cover against liability in contract for pure economic loss. Illustrative examples of this approach are James Longley & Co v Forest Giles Limited [2002] 1 Lloyd’s Rep IR 421 and Bartoline Limited v Royal Sun Alliance plc [2007] Lloyd’s Rep IR Plus 18. In the former, an indemnity was sought under the Public Liability Section (Section 3) of a Builders Contractors and Allied Trades Combined Policy issued to a sub-contractor who had spent money rectifying a defectively laid floor and who had been sued to judgement in contract by the general contractor for losses caused by delay. The principal wording of the public liability cover was:

All sums for which the Insured shall be liable at law for damages in respect of (a) bodily injury to any person; (b) Damage to property; (c) Obstruction loss of amenities trespass or nuisance; occurring during the period of Insurance and arising in connection with the Business.

In the course of upholding the trial judge’s decision that neither the cost of rectification nor the damages payable to the general contractor were within the cover provided by Section 3, Potter LJ said:

It is not the usual intention, in a contractor’s public liability insurance, to give cover in respect of defective workmanship which requires rectification but does not cause physical damage to the personal property of a third party or interference with a third party’s property rights, as opposed to their purely economic interests.

In Bartoline, the claimant claimed to be entitled to an indemnity under the Public Liability Section of a Combined Policy in respect of: (i) expense incurred by the Environment Agency under s. 161 of the Water Resources Act 1991 in cleaning up certain water courses into which pollutants had entered consequent upon a fire on the claimant’s premises; and (ii) the cost of carrying out work specified in statutory Works Notices served on the claimant by the Agency under s. 161A of the 1991 Act. The Public Liability policy provided, inter alia:

The Company will provide indemnity ….(1) up to the Limit of Indemnity against legal liability for damages in respect of (A) accidental injury of any person (B) accidental loss of or damage to Property (C) nuisance trespass to land or trespass to goods or interference with any easement right of air light water or way other than legal liability for damages which result from a deliberate act or omission of the Insured or which is a natural consequence of the ordinary conduct of the Business and which could reasonably have been expected by the Insured having regard to the nature and circumstances of such act or omission happening during any Period of Insurance in connection with the Business. (2) Against legal liability for claimant's costs and expenses in connection with 1 above.

The claim made by the Agency against the claimant was not a claim made in tort. In the course of deciding that the Agency’s claim was not covered by the policy, HHJ Hegarty QC said:

108

…"Damages" are the pecuniary recompense given by process of law to a person for the actionable wrong that another has done him.

109.

…..Furthermore, at least in the field of marine insurance, it seems to me to be quite clear that this is the meaning which will normally be attributed to the word. Indeed, in that particular context, an even narrower construction has been adopted, even in the absence of an express term to that effect, since it will normally exclude any damages payable by the insured pursuant to contract.

110.

I can see no obvious reason why a different approach should be adopted in relation to other forms of public liability insurance. The essential purpose of such policies is to provide an indemnity in respect of certain types of tortious liability. That is reflected in the choice of the word "damages" in the insuring clause of the Policy in this case. As it seems to me, that is made even clearer by the particular context in which the word is used, since the indemnity is granted only in respect of "legal liability for damages in respect of … accidental loss of or damage to property … nuisance trespass to land or trespass to goods or interference with any easement right of air light water or way".

I also accept Mr Edelman’s submission that it is inappropriate to focus on particular words in the Insuring Clause such as “liable at law” or “all sums”. Instead, the clause must be read as a whole and “all sums” and “liable at law” must be construed in their setting within the clause, which in turn is contained in a public liability policy which is part of a standard insurance package. In M/S Aswan Engineering Establishment Co. Ltd. v Iron Trades Mutual Insurance Co Ltd [1989] 1 Lloyd’s Rep 289 the context was quite different: there the insurance was a third party (legal and contractual liability) policy, which, as Hobhouse J observed, is a quite different animal from a public liability policy. The context was also different in Cultus Lake Park Board v Gestas Inc since the policy before the court in that case excluded almost all tort claims.

What then is the meaning to be given to paragraphs a), b) and c) in the Insuring Clause? In my opinion these paragraphs have the meaning contended for by Mr Edelman for the reasons he advanced. Thus, paragraphs a) and b) plainly contemplate harm for which there is liability in tort, namely harm to someone’s bodily integrity or property interests (see Clerk & Lindsell on Torts (19^th ed), paras 1-21 to 1-25 and 1-32 to 1-35); and liability for such harm suffered by the public is going to arise in tort rather than in contract, particularly in the context of a construction project. Turning to c), “nuisance” is a well-recognised tort and it is clear that a claim in private nuisance can only be brought by a person who has an interest in the land affected, see Hunter v Canary Wharf Limited [1997] AC 655 and Clerk & Lindsell, para 20-44. “Trespass” too is a recognised tort actionable only by someone with an interest in the land affected. As to “obstruction” and “loss of amenities”, construed in their setting within the Insuring Clause and bearing in mind that we are dealing with a Public Liability Policy, I am of the clear opinion that the former refers to a particular type of actionable nuisance – obstruction of the highway or a private right of way -- and the latter refers to loss of or impairment to such amenities as the quiet enjoyment of possession of land and easements such as rights of way, rights to ancient lights, rights of support and water rights etc, all of which are species of property rights the loss of which or impairment thereto will give rise to a right to compensation in tort. Finally, Mr Edelman is obviously correct when he submits that “any like cause” must mean a cause which shares the essential characteristic of the other “causes” identified in paragraph c), namely some injury or prejudice to an interest protected by the law of tort. Thus in the case of “obstruction” “loss of amenities” and “any like cause”, whilst the clause is not naming a recognised tort it is nonetheless describing types of harm for which compensation will lie in tort.

This conclusion is reinforced by the decision in James Budgett Sugars v Norwich Union Insurance [2003] Lloyd’s Rep 110 where the limb of the insuring clause comparable to paragraph c) covered liabilities in respect of “obstruction trespass nuisance or interference with any right of way air light or water or other easement”. It was held by Moore-Bick J that this referred to “various infringements of legal rights relating to property.”

Interpreted in the context of paragraphs a), b) and c) as they stand to be construed, and giving due weight to the linking phrase “ in respect of”, I have no doubt that the core meaning of the words “all sums for which the Insured shall be liable at law” is all sums for which the Insured shall be liable at law in the torts of nuisance and trespass and such torts as provide compensation for the harm identified in paragraphs a) and b) and the balance of c).

I say “core” because I think that the Insuring Clause is to be construed as covering liability in contract which is co-extensive with the liability in tort comprehended by paragraphs a), b) and c). I say this because any other construction would be decidedly uncommercial. In short, it would be absurd if liability for a contractual breach of a co-extensive tortious duty causing harm within a), b) or c) were outside the cover of the policy, whereas liability for breach of the tortious duty were within the cover.

I agree with Mr Edelman that Exception 6 a is in the policy to deal with cases where there is liability for breach of a contractual duty that is co-extensive with a tortious duty comprehended by paragraphs a), b) and c) and that the Exception is designed to ensure that certain heads of damages irrecoverable in tort are excluded in such cases.

I should add that I found none of the cases cited by Mr Fenwick which are referred to in paragraph 14 (fn1) above to be persuasive. They all involved products liability policies or a products liability extension to public liability cover and it is therefore not surprising that those policies contemplated liability in contract because the prime candidate as a claimant is the person to whom the insured sold the goods. The cases also all involved physical damage to the third party claimant’s property, which is not the case in Chiltern’s claim against Tesco.

In my opinion, it cannot have been intended that the meaning of paragraphs a), b) and c) should radically differ depending on whether the Contractual Liability Extension applies or not. Instead, to avoid such an odd outcome and to give proper effect to the words “shall be the subject of indemnity under this Section”, the Extension is to be construed as doing no more than extending cover to an insured who is liable in contract for a tort comprehended by a), b) or c) which has been committed by another party in the course of the project. Mr Edelman’s explanation for the Extension was entirely convincing. As he submitted, it is far from unknown for persons potentially affected by construction works to obtain a contractual indemnity from a particular participant in the project for loss caused by any of the participants in the project. It is also often the case that parties involved in a construction project agree to transfer between themselves tortious liabilities arising in the course of the project. The function of the Contract Liability Extension, together with General Policy Extensions 1 (a) and (f), is therefore to allow for the transfer of tortious liabilities covered by the Insuring Clause without impairing the cover provided.

On Mr Edelman’s construction of the Insuring Clause, all of the words have a consistent meaning and the concepts used in paragraphs a), b) and c) have a defined and certain ambit. His construction also makes sense as a commercial package and fits in with ordinary and traditional notions of public liability insurance. If, on the other hand, Mr Fenwick’s construction of the Insuring Clause were accepted, the clause would cover any impact on the economic interests of third parties which arises out of a cause falling within the freestanding and hence uncertain concepts of “loss or damage to material property”, “obstruction”, “nuisance” or “loss of amenities”. In other words, the policy, far from being a public liability policy, would be in the nature of a private liability policy where the victim of the harm has no remedy in law other than by virtue of a particular private promise. I cannot accept that this is what the clause is intended to cover. In my judgement, for the reasons I have given, the construction advanced by Mr Edelman is plainly the correct construction. It follows that, since none of the loss for which Chiltern is to be compensated under the Deed is loss for which Chiltern would be entitled to be compensated in tort, Tesco is not entitled to the indemnity it seeks from the defendants.

Since the cover provided by the Insuring Clause is limited to liability where a third party has suffered harm compensable in tort, the question posed by Issue 3 is whether the words “in respect of” limit what would otherwise be the damages recoverable in tort for the harm in question. However, I was told at the hearing that the agreed facts do not appear to give rise to a situation where it could be argued that the damages in tort would be greater than the damages that were “in respect of” the harm suffered. Accordingly, and with the agreement of both sides, I do not propose to answer Issue 3, for at present to do so would not be of any practicable assistance. However, if a particular situation emerges in relation to which the defendants wish to argue that the words “ in respect of” limit the insurance cover to a level below the damages recoverable in tort, the parties can come back to court and argue the point by reference to that particular situation.

Issues 1 and 2 essentially raise the same question. For the reasons I have given above, I answer no to each of the questions posed. As explained in paragraph 39, I decline to answer Issue 3, but the parties shall have liberty to apply if they conclude that an answer to that question would be of assistance.